South Africa: How the MLI will impact on investment structures involving Mauritius
Those investing into South African companies via Mauritius need to evaluate whether they can defend their structures against any future PPT related challenges that may arise.
South Africa and Mauritius are popular holding jurisdictions for investment into other African jurisdictions because of tax relief afforded under these countries' tax treaty networks, particularly in regard to withholding taxes. Although South Africa itself is often used as a direct gateway into Africa, many South African headquartered groups and other South African taxpayers also make use of Mauritius as a holding company jurisdiction for sub-Saharan African investments.
Both South Africa and Mauritius are signatories to the OECD's Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). Certain existing and future investment structures need to be analysed in light of this.
At the time of signature of the MLI, Mauritius submitted a list of 23 tax treaties that it would like to designate as covered tax agreements (CTAs). This list excludes a similar number of tax treaties which Mauritius has said may be amended in due course through bilateral negotiations. Interestingly, the treaties selected by Mauritius as CTAs do not include Mauritius' treaties with sub-Saharan African countries other than Madagascar, South Africa and Swaziland. This means that Mauritius' treaties with countries such as Botswana, Mozambique, Namibia, Rwanda, Senegal, Uganda, Zimbabwe and Zambia will continue to apply in their existing form until such time as they may be amended through bilateral negotiation, a process which is not certain to happen and which if it does, could be very time consuming.
For investors making use of Mauritius as a holding company for investments into these sub-Saharan African countries, therefore, it is likely to be 'business as usual' for the foreseeable future in terms of any tax treaty benefits afforded by the target countries to Mauritius. These will not be affected by the MLI.
By contrast, since both Mauritius and South Africa have signed the MLI and selected the Mauritius-South Africa treaty as a CTA, structures involving a Mauritian holding company owning investments in or through South Africa could be vulnerable to challenge and loss of South African treaty benefits once the principal purpose test (PPT) in the MLI takes effect.
Mauritius has accepted the PPT rule as an interim measure, but stated that in time it intends to adopt a detailed limitation of benefits provision in its CTAs through bilateral negotiation. South Africa has opted for the PPT rule to apply to all of its CTAs. Article 7(4) of the MLI provides that a person that is denied the benefits of a CTA under the PPT may still qualify for those benefits if on request and after due consideration, the relevant competent authority determines this to be appropriate. However, although Mauritius has elected for Article 7(4) to apply to its CTAs, South Africa has not done so. Consequently no Article 7(4) relief will be available under the Mauritius-South Africa treaty should treaty benefits be denied under the PPT.
It is important for investors holding into South African companies via Mauritius to evaluate the extent to which the commercial rationale for their structures will enable them to defend any future PPT related challenges that may arise.
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